For all private equity investors, the final goal is to realize the return on their investment after a certain amount of time, usually after three to seven years since the original transaction took place. Exit by private equity investors is therefore an imminent aspect of every private equity transaction. Also, the number of successful exits achieved by a certain private equity house has a strong influence on its ability to attract investors and raise funds.

What investors fail to realize is that a full proof exit strategy is essentially what makes a private equity deal score over and above other similar deals. A right exit strategy ensures wealth creation and protection alongwith smooth transition. If the exit plan is weak or uncertain, a good private equity investment plan may turn into a financial ruin. To seize the real deal in private equity, exit strategy should be the foremost consideration.

Accordingly, the potential exit opportunities from an investment plays a decisive role in selection of private equity funds and proposals. This is the reason why exits strategies receive such special attention from the earliest stages of the deal.

Being a flexible financial model, private equity investment offers several exit options depending upon the fund structure and customization by fund managers. The most frequently-used and popular exits routes are presented herein below:-

Initial Public Offering

Initial public offering (“IPO”) method is whereby shares of the investment company gets listed on the stock market for the first time, so the investor is be able to sell its shares to the public. This is one of the most popular exit strategies at times of stable economic conditions as it is likely to enable the investor to realize the highest return on its investment.

However, IPOs also have serious disadvantages compared to other exit methods.

The equity share is exposed to fluctuations and other market risks for a certain amount of time after the IPO is carried out. Additionally, IPO is a cumbersome and expensive process involving compliance of strict regulatory requirements and restrictions.

Trade Sale

Another commonly used exit route is the trade sale in which the private equity investor sells all of his/her ownership rights in the investment company to a trade buyer, i.e. a third party often operating in the same industry. This method is preferred by private equity providers mainly because it provides a complete and immediate exit from the investment. Another reason can be the quick and efficient process owing to a single person transaction with no regulatory restrictions unlike IPO. The investor is in-charge and exercises full control over the whole exit regime and may also be able to recover higher returns through negotiation process.

Trade sale comes with its own set of issues and difficulties. The management of the project may feel threatened due to change in the controlling party and act as a hurdle in completion of the exit strategy. The trader may obtain confidential information during the negotiation process and misuse it, posing a serious business risk.

Secondary Buyout

Secondary Buy-Outs (SBOs) are transactions in which a private equity firm sells a portfolio company to another private equity firm. They are also known as sponsor to sponsor deals.

In this exit strategy, private equity houses appear on both sides of the deal. The private equity firm purchasing the equity investment does so with the intention of value addition to a familiar asset in another private equity firm and utilization of the excess cash available with them.

There are a number of possible reasons why an investor may choose this method as the exit route. It can be a means of shortening the life-time of a transaction in light of the current economic climate or unwillingness or inability to grant finance to the business anymore, even though the company might not yet be ready for a trade sale or IPO. In this situation, selling the company to another private equity firm can be the ideal way to move ahead.

A secondary buyout offers a swift and complete exit for investors which plays a significant role in its increasing popularity.

Leveraged Recapitalization

Leveraged recapitalization is an exit method, whereby the private equity investor is able to extract cash from a business without actually selling the company. This is achieved by changing the capital structure of the company i.e. substitution of the company’s equity with additional debt. Under this method, a private equity company borrows money from a bank or issues bonds or makes use of its own reserves, to repurchase their shares from the investor. The most important advantage associated with leveraged recapitalizations is that the control of the investment is vested in the remaining investors. On the other hand, a leveraged recapitalization may also result in imbalance of capital structure which can lead to financial difficulties and even bankruptcy. A pressure is created on the company’s operations for timely repayment and accountability to debt lending institutions and banks.

The rationale cited by the private equity firms behind preference of this method is the maintenance of control over the enterprise and wilful avoidance of uncertainty prevailing over the IPO market.

From the aforesaid paragraphs, one can understand that volatility of returns in private equity market is largely attributable to the kind of exit strategy one selects. Therefore, adopting the right exit strategy could save you from all the anxiety while going for private equity investment.

IKIA, a research based real estate portfolio management firm in Chennai, was established with the sole intention of promoting, generating and preserving wealth creation by providing competitive financial advisory services to all. They act as knowledge partners and financial guide to private equity investors throughout the deal structuring process including selection of the correct exit strategy, keeping in mind an individual’s investment goal. IKIA specializes in real estate private equity deal structuring and have been successfully advising on the real estate private equity deals since 2012. The five-member research team at IKIA evaluates and analyses primary data collected by them to provide customized solution to investors.

Every investor should approach financial advisory and portfolio management firms like IKIA for leveraging on their financial expertise and to be aware of the wealth creation opportunities in the present economic condition.

The biggest motivation behind private equity investment in real estate is the expectation of extra-ordinary returns. In private equity deals, high returns are projected but not assured. Then why should people invest in private equity and not private debt.

Risk appetite, that is the ability to sustain risk, is the deciding factor. An investor with high risk appetite eyeing exceptional returns should definitely include private equity in his/her investment portfolio.

This does not mean that an individual with low risk appetite cannot invest in private equity. Risk appetite being a subjective matter differing for each individual cannot serve as a blanket criteria for investment planning. Anyone with the desire of earning high returns can invest in equity.

Real estate as an asset class is very popular for its inherent feature of capital appreciation and low risk. The lucrative combination of private equity and real estate is not new to investors, what is unknown is the selection of right proposals for reaping the estimated benefits.

Joint venture between Land owners, Developers and Private equity Investors for project construction and development is the current rising trend in real estate sector. The Investor enjoys equity like returns and a low risk profile, the kind of proposal every investor awaits.

Here is a complete checklist of activities that should be undertaken prior to investing in real estate private equity deals (including Joint Ventures) –

1. Investment strategy

Identifying profitable projects or ventures wherein established and reliable Developers are involved. The Developer should have a clear construction plan along with flexible and suitable financial strategy and provision for back up operations in case of unwanted changes in economic scenario.

An ideal business model should be simple, transparent and practical.

The Developer should have outstanding management team for timely and orderly implementation of projects:

Experienced and passionate people with a disciplined and execution-led approach

Cooperative mind-set with due respect to partnerships

Impressive trackrecord

High level of integrity

Accessible for open communication

2. Investment focus

Assessment of socio-economic trends, local consumption patterns and supply demand gap on an ongoing basis through macro & micro market research, financial analytics and frequent interaction with industry connections. Adjustment of investment focus on selected real estate proposals in consonance with the observations emanating out of the aforesaid exercise.

3. Investment Process

Deal Sourcing and Evaluation

After the first two steps, the participants of the selected real estate proposals are approached for finalizing the terms of agreement. Once all the participants are on the same page with respect to terms and conditions of the proposal, the investor shall evaluate the proposal from all aspects, most importantly legal and financial and request for the requisite data and documents pertaining to the property for the said purpose.

Due Diligence

If the Investor is satisfied with the proposal evaluation, he/she shall proceed with tax , legal and regulatory due diligence of the concerned property.

Deal Structuring

This step is of immense importance as it forms the bedrock of the whole transaction or deal. Structuring a deal involves deciding upon the investment size, entry point, lock in period, risk mitigation practices and other considerations.

Monitoring investment

Constant monitoring plan to keep a tab on the project financials is important to ensure control over the investment.

4. Exit Strategy

For earning the maximum benefit, exiting at the right time is crucial. This step is taken care of while structuring the deal in real estate transactions.

The likelihood for conversion of projected returns to actual returns can be enhanced by signing the right deal and the aforesaid checklist is the key to such right deals.

However, committing to such a rigorous procedure can be arduous for an individual investor. Apart from the time spent on the investigations, application of financial concepts and analysis is also needed to complete the checklist. That’s why real estate financial advisors and consultants play a significant role in real estate investment. The expertise gained from theoretical and practical knowledge involving use of complex financial calculation, data analysis and primary market research alongwith the ability to apply the observations on the current market situations and accordingly designing the deal structure, is what defines a real estate financial consultant.

Therefore, do not hesitate to rely on an expert for adding value to your investment portfolio.

IKIA Consulting Services, a real estate portfolio management firm based in Chennai, pioneers in providing valuable financial advisory services and primary research based reports encompassing project catchment study, absorption trends, price & market inventory trends, regional & socio-economic profile, environmental study, demographic study and other macro and micro trends impacting the investment project. They provide research facilities not only for investors but Developers too like financial viability report, product viability report and risk reports. Further, customized deal structures are prepared in coordination with the dedicated in-house research tea, keeping in mind the objective and focus of the investors. Project monitoring services for ensuring safety of investment also forms part of the services offered by IKIA Consulting Services.

Private equity investments in real estate present you with all the benefits and privileges of an equity investment combined with the risk profile similar to a debt investment. To earn real wealth, one must invest in private equity.

Notwithstanding the dull economic scenario globally, India has been and remains a shining spot for investment opportunities. India continues to emerge as an international powerhouse – the world’s largest democracy with the potential to develop into an economic giant.

Private equity funds are investment vehicles that seek equity stakes (partial ownership) in private companies and do not participate in publicly traded securities. They may invest in private placements of securities from public companies.

India has attracted a great deal of attention from international private equity funds eager to take advantage of the significant growth opportunities in fast evolving market. The sustained economic boom seen in India over recent years has led to an array of investment opportunities in private equity. This is evident from the continuous flow of investment capital to private equity funds and the lightning pace of deal execution everyday. The private equity industry in India continues to expand and is becoming increasingly competitive.

In India, the traditional sectors of private equity investment are IT and telecoms, infrastructure and real estate. These sectors continue to depend on private equity to bridge the fund gap. Global financial crisis has opened up new target sectors, with funds being deployed towards projects in education, healthcare, life sciences, energy, logistics and microfinance.

Investment interest in these sectors reflects what is essential to India as a developing nation – with its huge need for healthcare provision, infrastructure, modern communications and power generation.

Real estate is one of the fundamental and core sectors of private equity investment. The need for land, a limited and scarce entity, and its efficient utilization is the top priority for a developing economy. The need for residential and office space is a never ending circle. Additionally, India is in a growth phase demanding more space for manufacturing and services industries year-on-year. Urbanization trend coupled with current population pressure are other factors pushing the requirement for increased activity in real estate.

Real estate sector has an immense investment potential and private equity investors are much aware of it. Private equity (PE) investors have been and continue to infuse more money into India’s real estate market which is a sign of their continuing confidence in the long-term viability of this sector.

Lack of research and misunderstanding of the market pulse are responsible for the unwanted and unsold constructions today. Massive inventory issue faced by the Developers is a result of ignorance. This situation could have been safely avoided if timely advise was taken from the real estate consultants instead of blindly planning the projects.

The Developers are aggressively seeking fund since the need of working capital has become a real cause of concern with the dim project cash inflow while cash reserves of the company are getting extinguished in completion of existing projects. Then again, funds are also required for the commencement of new projects.

Private Equity has surfaced as a competitive solution to the dynamic needs of the Developers and real estate market. Large amount of funds can be easily procured by parting with partial ownership of the project, the beneficiary ratio is mutually decided by the parties. The compensation can be in the form of share in project revenue or a portion of the constructed area or both as per the arrangement decided upon.

According to the data from VCCEdge, PE funds in 2015 invested nearly $2.77 billion in real estate projects and companies across 81 deals, against $2.1 billion in 2014 through 90 deals.

For investors, this is an opportunity to deploy capital at attractive risk-adjusted returns in selective profitable ventures. The investor risk is minimal due to right of ownership in private equity deals. The fact that it is a Buyers’ market today cannot be ignored and this is translating into developers being able to get land at cheaper prices, thereby improving the overall economics, marketability and financing of a project.

Commercial and residential projects in recent months have seen some big-ticket transactions. Among residential projects, top developers with a good track record and delivery background attracted investors.

According to a report by Cushman & Wakefield, Private equity (PE) investments in the Indian real estate sector rose by 64 per cent to Rs 19,137 crore in the first six months in 2016 from both domestic and global investors. At the same time last year, PE investments in real estate stood at Rs 11,635 crore.

The residential asset class commanded the largest share of 44 per cent in the total investments during January-June 2016 while commercial office asset class accounted for 22 per cent of the investments. It is forecasted that 2016 could be the golden year recording the highest PE investments in real estate since 2008 at an estimated Rs 43,600 crore.

Real estate investments are spread across a broad horizon, with many offshore investors looking to ink transactions with developers directly through customized deals formulated by real estate portfolio management firms and consultants. Customized deals by real estate consultants offer the advantage of assured maximum return on investment without the hassle of undertaking research and investigation of the investment and projected financial numbers which is best left to the experts.

The attractiveness of India as a real estate investment destination persists because of the viable opportunities for growth and returns, the entrepreneurial drive and innovation of its young population, the promise of a stable and increasingly liberal economy, the faith in real estate as a safe investment asset and the embrace of consumerism that will continue to promote India as an attractive location for private equity investment activity.

Private debt comprises of those forms of debt financing that comes mainly from HNIs and institutional investors but not from banks. Contrary to publicly listed corporate bonds, private debt instruments are generally illiquid and not regularly traded in capital markets. In UK and the USA, it is an established form of funding and have long been used for growth finance and buyouts.

Senior debt refers to first ranking, secured loans used to finance buyout transactions and growth funding. Mezzanine is an intermediate form between debt and equity. It is used mainly for buyouts and growth finance. Returns can be partly through payment of fixed interest at one point of time or on regular intervals or through equity kickers. An equity kicker is a type of equity incentive typically issued in combination with privately placed subordinated or mezzanine debt to improve the return for subordinated debtholders. Equity kickers can have a convertible feature exchangeable for shares or warrants to purchase shares at a set price at some point in the future.

Distressed debt funds are the ones which mostly buy senior secured loans in the secondary market at a discount to their face value. They concentrate on acquiring sound assets in situations in which companies have run into financial difficulties.

Generally, the time period of investment ranges between 3 years to 10 years.

A business can finance its operations either through equity or debt. Equity is cash paid into the business by investors and in exchange they receive a share of the company, in effect a percentage of ownership proportional to total investment paid in. The share or stock may appreciate in value in proportion to the increase in the business’s net worth—or it may evaporate to nothing at all if the business fails. Stock appreciation and yield of dividends is what motivates investor to put money in the business but if the business does not earn profit, it cannot pay a dividend. The investor can get his or her investment back only by selling the share to someone else. For a private company, liquidity is an issue because the shares are not traded on the open market and it is difficult to dispose off the share. This is one reason why it is a troublesome exercise to raise money through equity for small and medium sized enterprises.

On the other hand, debt financing is cash borrowed from a lender at a fixed rate of interest and with a predetermined maturity date. The principal must be repaid in totality by the maturity date, additionally provision for periodic repayments of principal can also be incorporated in the loan arrangement. The lender shall have the right to demand back its investment under conditions specified in the borrowing arrangement.

Lending is thus a safer investment option than equity participation, but the amount a Lender can realise through lending option is fixed to the principal and interest charged. Whereas investment in equity is risky, if the company is very successful, the upward potential for the investor may be very attractive but if it is otherwise, the downside is total loss of the investment.

SOURCES OF PRIVATE DEBT :

Friends & Relatives

Many entrepreneurs begin their enterprises by borrowing money from friends and relatives. This source provides more flexible terms of repayment than banks or other lenders and may be more willing to invest in a new business, based upon mutual trust and relationship.

Finance companies

Most loans obtained through finance companies are secured by a specific asset as collateral and the lender can seize the asset if the small business defaults on the loan. Commercial finance companies provide small businesses with loans for inventory and equipment purchases and are a good resource for manufacturing enterprises. The drawback of this source is that they charge higher rates of interest compared to Banks.

Individual investors

Debt finance is a key investment area for individual investors. Individuals with large amount of cash at their disposal look out for debt financing opportunities because of its inherent nature of low risk and stable return. The short span of lock-in-period is also an attractive feature.

Entrepreneurs and owners of startup businesses must almost always resort to personal debt in order to fund their enterprises. Some entrepreneurs choose to arrange their initial investment in the business as a loan, with a specific repayment period and interest rate. The entrepreneur then uses the proceeds of the business to repay himself or herself over time.

The opportunity to earn stable returns at low risk earns it the top place at the index of investments with low risk profile. Its not only the risk factor but the higher rate of returns compared to other low risk instruments that makes private debt an irresistible path of investment.

In real estate, private debt is relied upon by the Developers many a times for seeking project capital. Real estate industry is a capital-intensive industry. The cost for construction of a project, apartment, Building, villa or other structure does not only include labour and raw material cost but also expenses on expert advice from architect, civil engineer, chartered accountant, and other people involved for completion of construction work. Dilution of ownership of companies on non-payment of interest is a big threat for any company and thus, for such large expenditure Developers prefer debt financing. However, the investors can claim preferential repayment of debt amount against all other claims in case of liquidation of the concerned Company.

Private debt is an enviable source of finance, given the competitive interest rate. In the current scenario, customised debt financing solution will become “need of the hour” for capital requirement of startups and medium enterprises. In real estate too, private debt can work as a magic portion for infusing capital into the illiquid market.

≈ Comments Off on P2P LENDING: A PERSPECTIVE AND COMPARISON WITH REITS

P2P or peer to peer lending has emerged as one of the key sources of procuring capital in recent years.

P2P is based on the principle of raising finance from “n” number of people who pool their resources together. There is no proper definition of P2P lending. One can define it as a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. It can be also explained as a financial innovation introduced with an objective to provide funding to people by connecting borrowers directly with lenders through an internet platform.

This system reinforces the power of crowd funding. The reasons for want of funds can range from professional to personal reasons like commencement of business, expansion or diversification of business, wedding, purchase of property, education fund, etc..

The need for P2P lending structure arose because Banks and financial institutions could not or felt reluctant to grant unsecured and small amount of funds. Although the demand for such unsecured and small funds remains high, moneylenders or individual bankers are the only ones catering to this sector who charge an exorbitant rate of interest being a monopoly.

The working concept of P2P is similar to a marketplace where buyers and lenders meet to enter into a debt financing agreement. This lending structure makes use oftechnology and online media to maintain communication between the parties, known as P2P platform.

The terms and conditions including the interest rate and duration are either mutually decided by the parties or by P2P platforms with the approval of the parties. The role of P2P platform is to introduce creditworthy borrowers to cash rich individuals who cannot be accessed by the individual borrowers generally.

Lenders make use of Reverse auction model, that is, the lender bids for the rate at which he/she wishes to lend a specific amount of money and Buyer shall have the right to choose among the Bidders, from whom they wish to borrow. Naturally, the lender with the lowest bid rate is preferred by the borrower. Prior to investment, the Lender can verify the credit score of borrowers at P2P platform without any actual interaction with the other party. These platforms have their own criteria’s of assessing the credibility of individuals and may physically verify the personal details of the borrowers. At the time of entering into debt agreement, post dated cheques may be taken from the Borrower to secure the repayment to Lender. All the transactions are made directly through bank accounts of the parties, which ensures that one round of customer verification is done through KYC norms of Banking institutions.

The P2P platform functions in the following manner:

1. Application of loan by Borrowers is made online on P2P platform.

2. Next is, evaluation of Borrowers to grant credit scores through data analytics. The method of assessment of borrowers depends upon the policies and practices of P2P platform.

3. Approved loan requests are then assigned a credit grade, which serves as a platform-specific rating system that reflects a distinct interest rate and affiliated levels of risk.

4. If the borrower agrees to the terms of the loan, then the platform uploads the borrower’s details onto the online marketplace as a distinct profile for the investors to review.

5. Multiple investors can invest in a single piece of loan for portfolio diversification and risk distribution.

6. Once the borrower and investor agree upon the interest rates and other terms and conditions, the agreement is vetted by the P2P platform.

7. The amount is deposited to the account of P2P platform by the investor which is further directed to the borrower’s account.

8. The entire process of lending and timely payment of returns is monitored by the platform.

9. The platform receives a fee on the loan for their services.

The major benefit of P2P is the availability of right amount of fund at the right time. While returns from fixed deposit can never beat inflation and equity returns can never be assured, P2P gives assured and timely risk adjusted returns. No lock in period is applicable here as the returns start at periodic intervals like monthly or bi-monthly payment. These periodic returns can be further reinvested in other investment vehicles or at the same P2P platform for earning revenue at compounding rates. P2P is thus, not only a better source of financing but investment too.

For an orderly growth of P2P lending in India, RBI has recently released a consultation paper on its regulation inviting suggestions from public. Once regulated, more people will start using the platform. At the same time, the fear of overregulation looms over the participants of P2P lending.

As the name suggests, any direct lending from one person to another can be categorized as peer to peer lending. It can be safely deduced that it is not a recent phenomenon but it was the Bank which had replaced such individual financing system in the past.

The revival of P2P lending system can be attributed to its digital makeover. In 2005, Zopa an online platform for peer to peer lending was introduced in UK. Based on this concept, several online platforms came up worldwide.

Within few years, P2P online platforms became popular in Indian capital market as well. At present, around 30 startups are in the P2P lending business.

As goes for any innovation in financial market, there is always a comparison for superior returns. Similarly, the comparison of Real estate Investment Trusts (REITs) and P2P lending by investors is inevitable. Both are new formats of investment capable of investing in real estate. However, there are various factors to look out for before choosing an investment vehicle. Hereinbelow is a snapshot of the differences between the two investment structures:-

Growth of P2P lending in real estate is not surprising, given the different client base of this system. The client assessment for P2P lending is totally different from banks and financial institutions as they do not reject borrowers on sole factor of financials and prefer credibility for shortlisting borrowers. Applying this concept to real estate, there is a large segment of medium- income population in need of homes. Banks lend money to this segment only if they give security and agree to a high rate of interest. In such scenario, P2P lending is a boon to the Indian economy.

Real estate is a trusted avenue of investment for all. Every person at some point of time, needs to buy a piece of land for his/her need of habitat. Land is limited while the population is growing at a geometric pace. Thus, the demand and value of land asset always remains high.

Recent Wealth reports released by Kotak and KPMG in 2016, indicate that HNIs have built a substantial portion of their wealth through investments in real estate and thus, they continue to favor and invest in this sector.

Then why is it that real estate markets fluctuate, are the economic factors responsible for that or there are other reasons too?

Economic factors play an important role in real estate market fluctuations. However, it is the lack of faith among the participants induced by fraudulent practices of some which is primarily responsible for the unusual behavior of real estate market.

Government came out with the Real Estate (Regulation and Development) Act in March 2016, to tackle the problem of distrust and to setup an effective consumer grievance redressal authority in all the States.

Real Estate (Regulation and Development) Act,2016

This Act applies to residential as well as commercial real estate projects. The provisions of this Act cover within its ambit three main parties- the Promoters (Builders), the Allottees (Buyers) and the Real Estate Agents.

This Act has been formulated for the benefit of Buyers and security of their hard-earned money. The Builders/ Developers as well as real estate agents shall be liable for conduct of any illegal, unfair or fraudulent act on their part. Heavy penalty has been prescribed for breach of terms of the agreement including default in timely completion of construction and delay in delivery of possession, between the Buyer and the Builder along with payment of equal interest rates on such penalty amount.

Seventy- percent of the amount received for the project is to be kept in a separate bank account, to prevent diversion of funds from one project to another by the promoter/builder, resulting in timely completion of the project. In addition, the provision of paying interest for any delay in complying with deadlines provided in the agreement or on website or advertisement, notice or circulars, will encourage the Builders and allottees to fulfil their obligations and duties on time. Timely completion of work along with efficient utilisation of funds will boost the investor confidence in real estate sector leading to increase in the investment flow.

For Builders also this Act is a good news because with increased investment in real estate sector, they stand to profit. Increase in real sector investment essentially means that the huge real estate inventory will be absorbed and the Builders will be able to realise their cash which is stuck in the form of these unrealized inventories and further invest it into other profitable projects.

Under the Act, a specialised forum called the “Real Estate Regulatory Authority” will be set up within one year from the date of this Act coming into force. In the interim, the appropriate Government (i.e., the Central or State Government) shall designate any other regulatory authority or any officer preferably the Secretary of the department dealing with Housing, as the Regulatory Authority.

This Act is a welcome step for safe and secure real estate investments.

Important provisions of the Act:

The promoter has to register their project (residential as well as commercial) with the Regulatory Authority before booking, selling or offering apartments for sale in such projects.

The Real estate agents also have to get registered with RERA.

Further, in case of ongoing projects on the date of commencement of the Act which have not received a completion certificate, the promoter of such project shall make an application to the Regulatory Authority for registration of their project within a period of three months of the commencement of the Act.

Certain projects need not be registered under this Act- (a) when area of land does not exceed 500 square meters or the number of apartments to be constructed in the project does not exceed eight apartments, or (b) projects with completion certificate, or (c) projects for the purpose of renovation or repair or re-development which does not involve marketing, advertising, selling and new allotment of such project.

Registration procedure involves disclosure of numerous information including but not limited to professional details of the promoter, history of projects launched by the promoter, copy of approval and commencement certificate, copies of sanctioned plan, layout plan and project specifications, draft of allotment letter, agreement for sale and conveyance deed, details of contractors, engineers, architects, real estate agent and other persons affiliated with the project and an affidavit by promoter.

Developers can sell units only in terms of the carpet area. Carpet area excludes the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.

Seventy percent of the project amount kept separately, is intended to cover the cost of construction and the land cost and the amount deposited shall be used only for the concerned project. Withdrawals from the account can be made after the grant of certification by an engineer, a chartered accountant in practice and an architect.

Registration under this Act maybe revoked if the Promoter (a) defaults in doing anything required under the Act or the rules or regulations made thereunder; or(ii) violates any terms of the approvals granted for the project; or (iii) the promoter is involved in any kind of unfair practice or irregularities.

On revocation of Promoter’s registration, his/her name will be published on the Regulator’s website under the list of defaulters, the bank account of project will be freezed and the information of such de-registration will be communicated to other State regulatory authorities.

In case of any misleading advertisement or publication made by the Developer in print or online media, the Buyer shall have the right to withdraw from the project and receive the investment amount along with interest rate applicable.

The Promoter shall provide the Buyer/Allottee with information as regards the sanctioned plans and layout plans along with specifications approved by the competent authority and stage wise time schedule of completion of the project.

A Developer cannot accept more than 10% of the amount of cost of apartment/plot/building as the case maybe, before entering into a registered agreement of sale.

The promoter cannot make any addition or alteration in the approved and sanctioned plans, structural designs, specifications and amenities of the apartment, plot or building without the previous consent of the allottee.

For a period of 5 years, the promoter shall rectify any structural defect or other defect in the workmanship, quality or provision of services or any other obligations of the promoters brought to his notice. If rectification is not done, the Buyer shall receive appropriate compensation for the same.

In case the promoter is unable to hand over possession of the apartment, plot or building to the allottee, then the promoter shall be liable, on demand being made by the allottee, to return the amount received by him from the allottee with interest and compensation. This relief will be available without prejudice to any other remedy available to the allottee. However, where an allottee does not intend to withdraw from the project, he shall be paid interest at the prescribed rate by the promoter for every month of delay, till the handing over of the possession.

Overriding effect of the provisions of this Act-In case of conflict between provisions of this Act and any other law, the provisions of this Act shall be applicable.

Once the Act becomes operative in practice, the following enumerated benefits are projected to arise:

1. Establishment of an independent Tribunal specifically for resolution of real estate disputes.

2. Increase in FDI inflow

3. Timely delivery of project units

4. Immunization against fraudulent, misleading and unfair practices

5. Ease in availability of finance- Financial intermediaries will not hesitate to grant loans as the Act mandates a list of compliances making the transaction very secure.

6. Transparency – The Act provides that all the details of the project including duration and grant of approvals, are to be published on the website and other publications.

7. Project planning – Due to heavy compliance requirements, project planning has to be undertaken by Developers, for smooth functioning of the construction work.

Concerns raised for ongoing projects:

How 70% of proceeds will be transferred to meet land and construction cost?

For ongoing projects, how to calculate 70% of proceeds after a certain percentage of the total amount has already been spent for construction, is a relevant question. No provision spells out calculation procedure in such scenario.

Procedure for alteration in plans.

The provision stating that consent of two- third buyers is essential for making alteration in plans, does not put light on who will constitute the two-third buyers. Will the buyers who have left the project midway be considered for calculation of two-third?

Which plan will be filed- original, sanctioned plan or latest version?

The number of plans for any project maybe multiple as before the commencement of this Act, there was no rule for alteration of plans. While registration process, the Promoter has to file the project plan under this Act. However, which plan is to be filed – sanctioned plan, original plan, or latest version of plan is not clearly put forward in the provision.

How to calculate timeline for ongoing projects?

The time line is one of the major issues of ongoing projects. If the timeline is calculated from the date of commencement of the construction- Builders will suffer and if the date of project registration under this Act is considered- possession to Buyers maybe delayed by a large margin, defeating the purpose of the Act.

The supplementary rules of this Act are pending government approval and modifications. Once these rules are enforced, the Act will become operational effectively. The real estate industry is eagerly awaiting the announcement of these rules with the expectation that the Government will address the aforesaid concerns and bring an end to the confusions surrounding this beneficial legislation.

In 2015, around 20 new online P2P lending companies were launched in India. At present, there are around 30 start-ups in the P2P lending business in India.

P2P or peer to peer lending means lending money to individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other financial institution. It can also be defined as the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. Since the peer-to-peer lending companies operate entirely online, they work on lower overheads and provide a host of services at a much cheaper rate than the traditional financial institutions. Due to low working capital requirements, they are capable of offering higher interest rates to Lenders as compared to savings and investment products of banks, while borrowers get the advantage of borrowing at lower interest rates, even after the P2P platform has charged a fee for providing their services including credit assessment of the borrower.

The growing popularity of P2P lending in Indian capital market can be owed to the simplicity of this structure. As it is an unregulated segment, these platforms operate in accordance with their own set of policy and practices. There is no set benchmark of operations or statutory backing for regulating this system. Being a new business model, same set of laws applicable to other financial structures cannot be applied to it. On realizing the gravity of the situation, RBI released a consultation paper on how to regulate the P2P lending structure in April, 2016.

This consultation paper became a debatable topic in economic conferences and conclaves. To address the concerns of general public, Shri R.Gandhi, Deputy Governor of RBI recently stated in an economic summit that it is the right time for regulation of P2P lending. In the light of the rationale discussed hereinbelow, one can correctly appreciate the measure taken by the apex banking and finance market regulatory institution.

Firstly, the impact of P2P lending platform on traditional banking system is still unaccounted for which is a cause of concern in itself as this may lead to disruption in the financial sector. The fear of any unknown or unwanted change in the positive economic scenario, mandates regulation of this financial structure.

Secondly, P2P lending will be promoted as an alternative source of finance and more people will be encouraged to use this lending structure. Economic condition will also improve with an increase in flow of funds. It may also encourage other lending institutions to soften the lending rates in order to successfully compete with P2P platforms.

Thirdly, to eliminate the risk of adoption of unhealthy practices by some players and to protect consumer’s interest through prevention of fraudulent transactions.

Being the only lending platform catering to small ticket funds at low interest rates, it may move towards monopolistic exploitation and cause imbalance in the financial market. To check such monopolistic tendencies, regulation is essential.

Fourthly, there are certain provisions of RBI Act, 1934 which may create problems for operation of P2P platform in India. Section 45S of RBI Act, 1934 prohibits individuals, firms, or unincorporated body of individuals from accepting deposits if they carry on activities of financial institution as defined under Section 45- I of RBI Act, 1934. Further, as per Section 58B (5A) of RBI Act 1934, if such individuals, firms or unincorporated association act in contrary to aforesaid provisions, they may be imprisoned for a term extending to 2 years or fine amounting to double of the deposit accepted or with both. If P2P lending platforms want to run their operations legally, they have to comply with the existing RBI Act and other law provisions for the time being in force. Therefore, regularization is essential for continued functioning.

Other factors favoring regularization include orderly growth of the financial model, prevention of money laundering, transparency in operations and implementation of effective consumer grievance redressal mechanism.

The RBI Consultation paper has put forward the following propositions for regularisation and invited suggestions on the same:

1. In order to bring P2P lending under the purview of RBI, it shall be treated as a Non-banking financial institution (NBFC).

2. All the transactions between the lender and borrower shall take place directly through bank account transfers. P2P platforms will be prohibited to take deposit from the lenders. This will remove the contradiction between the RBI Act provisions and operating practice of P2P lending. Additionally, the threat of money laundering is also tackled effectively.

3. RBI will act as the regulatory authority and supervise the operations of P2P platforms.

4. P2P platforms to be incorporated as Company. This has been suggested as RBI cannot regulate individuals or partnership firms but only company and corporate societies.

5. Minimum capital of 2 crores is fixed to prevent formation of dummy or misleading companies. This provision of capital requirement will ensure continued operations of the company even when it experiences a rough patch.

6. Provision for leverage ratio will also be made by RBI as a prudential norm for maintenance of solvency.

7. Restrictive provisions on the amount of lending that can be granted by one Lender or the amount that can be deposited in favor of one Borrower, may be prescribed.

8. Regulation on fund advertisement by the platform.

9. Corporate governance- Some of the Board members must have experience in finance sector. Other qualifications may also be prescribed for Promoters, CEO and Directors of the Company to be declared fit for working in the P2P platform. Provisions for physical presence of office and management within the domestic territory is also under consideration.

10. Risk management system to be maintained and reported to RBI for smooth operations of the platform.

12. Provision for installation of system for guaranteeing confidentiality of customer data will be mandatory.

13. For recovery of loans, existing guidelines of NBFC’s are to be followed.

14. Prohibition on providing assurance of return for any investment.

All these propositions have been well received with some suggestions by participants and drivers of P2P lending in India.

The lending transaction should be tracked by a separate nodal agency or through an escrow account for transparency and accountability in the financial transactions.

The Owners of P2P Company should be given the right to directly approach credit information bureau and report Defaulters.

P2P is a new financial model and it should not be treated as traditional NBFCs. With grant of status of NBFC, the P2P system will suffer the consequences of heavy regularization which may take away the attractiveness of the simplicity of this structure.

The provision for leverage ratio cannot be made applicable to P2P lending because no credit is given by the platform directly. Instead, provision for credit insurance fund could be made to protect the investors.

The large capital requirement of Rs. 2 Crores is uncalled for, alternatively flexible provision for maintenance of capital in accordance with the outstanding loan amount could be adopted.

Most importantly, NRIs should be allowed to invest in the P2P fund as they are one of the biggest contributors to this fund.

The RBI should act upon these suggestions and come up with a user- friendly legislation on P2P lending. Otherwise, the success of this financial model will be short lived due to the formulation of rigid and complex rules by RBI.